Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul Swinge. You
Speaker 1: along with my co host Lisa Brahma Wicks. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
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Speaker 1: at Bloomberg dot com. Well, we are just about through
Speaker 1: the earnings results for the big banks. We had Morgan
Speaker 1: Stanley report earnings this morning. Kind of a mixed bag,
Speaker 1: I would say, from some of the big money center
Speaker 1: banks and global investment banks. That kind of help us
Speaker 1: pass through what we are seeing. We welcome Ken. Leon
Speaker 1: Ken is a global director of Industry and Equity Research
Speaker 1: at c f R. A Ken, thanks so much for
Speaker 1: joining us. Let's start with Morgan Stanley since they just
Speaker 1: printed this morning. What would you take away there? So
Speaker 1: it was an earning speed eight sets and they did
Speaker 1: this really on the more stable businesses and wealth management.
Speaker 1: Asset management and cost control areas that are really a
Speaker 1: burden right now are tied to the capital markets. Uh,
Speaker 1: the equity underwriting was flat sixtent come down, m and
Speaker 1: A has really fallen off for Morgan, failing at other
Speaker 1: banks down eighteen percent, and of course trading as well.
Speaker 1: UM has been weak with investors on the sidelines as
Speaker 1: it relates to global worries about trade tariffs and things
Speaker 1: like that. So Ken wired shares basically flat this morning.
Speaker 1: Shares are flat UM, and I would say all the
Speaker 1: large banks had a terrific four week performance, you know,
Speaker 1: first starting with the June seven Federal Reserve approving their
Speaker 1: capital plans. UM. Morgan Fanley is up about ten percent
Speaker 1: since June. UM. Looking at the stock today, we reiterate
Speaker 1: our by recommendation. We have a forty nine dollar target
Speaker 1: price and feel that, uh, you know, the overhang just
Speaker 1: on the capital markets, you know, for Morgan Stanley to
Speaker 1: hit it out of the park or a fire on
Speaker 1: all cylinders need to see improvement related to investment banking.
Speaker 1: So Ken, let's talk to let's go to the capital
Speaker 1: market side of the business for these big banks here
Speaker 1: it's been you know, I'm just thinking back, you know,
Speaker 1: three or four or five quarters, it's been very difficult
Speaker 1: for these companies to put us some good numbers. And
Speaker 1: I'm just wondering, is this kind of a a cyclical
Speaker 1: issue just market conditions or is this something more secular
Speaker 1: about just kind of the profitability that these capital markets
Speaker 1: desks and businesses can generate for these big investment banks.
Speaker 1: It's a great question, and related to capital markets, particularly banking,
Speaker 1: it's it's cyclical. Um. You know, Morgan's Familey, Goldman and
Speaker 1: JP Morgan are usually typically in the top three rankings
Speaker 1: of anything you choose and underwriting, and then when it
Speaker 1: relates to their business, Morgans Faniley has been really moving
Speaker 1: away from kind of cyclical businesses to the ability to
Speaker 1: have more stable recurring revenue and they're getting that from
Speaker 1: a Lard's wealth management franchise and the ability to expand that. Um.
Speaker 1: The difference really in performance for these stocks versus other
Speaker 1: others in the financial sectors predictability. So um, yes, capital
Speaker 1: markets is important, but I think directionally, whether you look
Speaker 1: at a Morgan Stanley or Goldman Sachs diversifying it to retail,
Speaker 1: they're they're looking for more predictable businesses that give investors
Speaker 1: more confidence about their outlook. So Ken, you know, now
Speaker 1: that we have the major US banks all reporting, I'm wondering,
Speaker 1: what do you mean your big takeaways. The big takeaway
Speaker 1: is focuses on the inverted deield curve or the forward curve,
Speaker 1: which suggests um a narrowing of net interest margin and
Speaker 1: then lower net interest income and calibrating what that does
Speaker 1: for the earnings outlook. So that's a factor. But at
Speaker 1: the same time, there's other inputs into net interest income,
Speaker 1: which for the other large banks of that can be
Speaker 1: you know, of their total net revenue UM it's growth
Speaker 1: and investor accounts or in retail banking. Uh, the consumer
Speaker 1: is very strong. Yet each of these banks has sensitivity
Speaker 1: to net interest income, so they have to pull growth
Speaker 1: from non interest income, which is their businesses, and then
Speaker 1: also from cost control. The other big plus, because we
Speaker 1: we've moved the story away from the capital plans, these
Speaker 1: are very significant for all these acts. The ability to
Speaker 1: have significant return of capital with buy back and dividend
Speaker 1: increases including more in Stanley today now to ten point
Speaker 1: seven billion buy back six pin point seven percent dividend
Speaker 1: increased rays these banks are beginning to look at attractive
Speaker 1: total return yield stocks and you could not say that
Speaker 1: over the last seven to ten years. So I guess
Speaker 1: can one thing I'm struggling with I mean, I get
Speaker 1: the sort buy back dividend story. It's just an income story.
Speaker 1: But going back to what you were talking about with
Speaker 1: the net interest margin, this has been offset in the
Speaker 1: past years of financial oppression in the wake of zero
Speaker 1: rate policies. It's been offset by much higher capital markets activity.
Speaker 1: What does it say to you that we are not
Speaker 1: seeing that acceleration in capital markets activity now and you
Speaker 1: know the prospects going forward, even with lower rates ahead,
Speaker 1: the prospects that perhaps capital markets are kind of done
Speaker 1: as far as what they need to be doing well.
Speaker 1: There's two areas here. First, related to interest rates, that
Speaker 1: this is a reversal to where we were at the
Speaker 1: end of last year. So analysts were factoring and rising rates,
Speaker 1: perhaps two to three increases, and that went away, So
Speaker 1: then of course that reverse net interesting income. The other
Speaker 1: part of your question is really interesting and it really
Speaker 1: ties to what's going to spur the capital markets. We
Speaker 1: had Chairman Pal two weeks ago testifying essentially the worry
Speaker 1: is about in the US at least investment capital investment
Speaker 1: and plant and equipment um and there's been a delay
Speaker 1: in doing that. There's also uncertainties that really tied to
Speaker 1: CEO confidence. Uh the ability to invest here or overseas
Speaker 1: or even mergers and acquisitions for all these banks is down. UM.
Speaker 1: There is a good pipeline related to uh N N
Speaker 1: a UM, but it's been very challenging right now because
Speaker 1: the visibility is very difficult. Ken Leyan, thank you so
Speaker 1: much for being with us and for all of your insights.
Speaker 1: Can lea On, Global Director of Industry and Equity Research
Speaker 1: at c f r A Research. It's ten thirty three
Speaker 1: on Wall Street. Time to check in with Bloomberg Opinion.
Speaker 1: We are so lucky to be joined by Shara O.
Speaker 1: V Day Bloomberg opinion columnists focusing on all things technology. Obviously,
Speaker 1: today the big story not just in technology but broadly
Speaker 1: across stock markets. Netflix shares down more than ten percent.
Speaker 1: They reported yesterday after the bell that they missed their
Speaker 1: subscriber forecast by what more than fifty percent, almost almost
Speaker 1: fifty percent, and that it's a subscriber base dropped in
Speaker 1: the United States. What happened? I do not know. I
Speaker 1: think the company's company. What is your explanation? The company's
Speaker 1: explanation was a couple of things. One is that Netflix
Speaker 1: increased prices for most subscription plans, both in the United
Speaker 1: States and in several other countries at the beginning of
Speaker 1: this year. Starting at the beginning of this year, and
Speaker 1: the company said that it missed its subscriber forecast um
Speaker 1: even more than an expected in as places where it
Speaker 1: increased prices, which to me shows a lack of pricing
Speaker 1: power for Netflix. Right if if the idea of Netflix
Speaker 1: is this thing is so valuable, people will pay whatever
Speaker 1: it costs to get access to it, I think this
Speaker 1: these second quarter numbers kind of deflated that idea. The
Speaker 1: second issue Netflix raised was it has, you know, It's outs,
Speaker 1: all of these kind of original programmings or stuff that
Speaker 1: it buys and airs exclusively on Netflix, and it said
Speaker 1: that the slate of programming in the second quarter drew
Speaker 1: in fewer subscribers than it had expected, which is not
Speaker 1: a great sign either for Netflix ability to kind of
Speaker 1: pick must watch programming, or frankly, for this implicit promise
Speaker 1: of Netflix that it doesn't really matter. Individual pieces of
Speaker 1: content are not that material. The thing that matters is
Speaker 1: this kind of buffet of offerings. So if people are
Speaker 1: looking at that buffet and making a decision to turn
Speaker 1: off Netflix or not subscribe to Netflix because of one
Speaker 1: or two shows. That maybe indicates that individual pieces of
Speaker 1: programming are more were important that Netflix suggests. And again
Speaker 1: I think that that dense the thesis behind the optimistic
Speaker 1: scenario about Netflix. Sure, I think you're spot on there.
Speaker 1: I think that and that raises I think probably the
Speaker 1: big issue for a lot of people that are concerned
Speaker 1: about this doctor bears out there that boy, it kind
Speaker 1: of sounds and looks like it's starting to sound starting
Speaker 1: to look like more of a just a traditional media
Speaker 1: company where you gotta have hits, and you know, it's
Speaker 1: not just about having the you know, there's the secret
Speaker 1: sauce of oh I'm a streamer. Now did they talk
Speaker 1: at all about uh, to what extent did they talk
Speaker 1: about competition? Because we know that Disney Plus is launching
Speaker 1: this year than a T and T Comcast or launching
Speaker 1: their streamers next year? How did they kind of frame
Speaker 1: that up? Netflix, at least in the second quarter, downplayed
Speaker 1: the effective competition because it said, look, we were all
Speaker 1: aware of these looming competing Netflix like services from HBO
Speaker 1: or or from a T and T, s Time Warner division,
Speaker 1: from Apple, from NBC down the road. But those haven't
Speaker 1: started yet, right, So it's not like there's an immediate, uh,
Speaker 1: competitive threat out there that is currently launched Disney. I
Speaker 1: forgot to mention Disney. So there's nothing new necessarily on
Speaker 1: the horizon. But you've got to think that some of
Speaker 1: the competition, it's it's in people's brains, right. If you know, hey,
Speaker 1: there's gonna be this new thing from Disney or from HBO,
Speaker 1: maybe that plays in people's minds that they're kind of
Speaker 1: saving money to see what Apple comes up with or
Speaker 1: what Disney comes up with. But Netflix kind of said
Speaker 1: that that wasn't a factor in the second quarter. So
Speaker 1: this sounds bad, okay, I mean like just a suit
Speaker 1: a stute analysis from Trunch and Trunch analysis. Um, this
Speaker 1: all sounds really bad. And certainly you're seeing a big
Speaker 1: stock price move. Looks at the bonds. Some of them
Speaker 1: traded down, you know, a couple of cents on the
Speaker 1: dollar yesterday, but there's still trading above par. And this
Speaker 1: is a company that has relied on debt markets to
Speaker 1: continue to burn cash, and it seems like debt markets
Speaker 1: believe in them. They're saying, we believe and you're seeing investors,
Speaker 1: analysts a cross wall streets saying we do believe also,
Speaker 1: and we're going to say we should you should go
Speaker 1: out and buy Netflix shares. What's the bull case from
Speaker 1: here that this was just a temporary blip and that
Speaker 1: we'll see Netflix gain its mojo in the third quarter.
Speaker 1: I think the bull case is that, as you said
Speaker 1: that that this may be a blip, you see that
Speaker 1: Netflix is expecting that it's going to return to more
Speaker 1: normal kind of subscriber growth numbers in this current third quarter.
Speaker 1: But let me make it clear Netflix does not exist
Speaker 1: period without the faith of bond investors. This is a
Speaker 1: company that is burning three to three and a half
Speaker 1: billion dollars in cash every single year. It is not
Speaker 1: financially sustainable unless it can continue to borrow money at
Speaker 1: cheap rates. Otherwise there is no Netflix. And so anything
Speaker 1: that dnse the story dense the optimism of both bond
Speaker 1: and stock investors, which are kind of working in tandem
Speaker 1: here on Netflix. Anything that that dnse, that story threatens
Speaker 1: to kind of unraveled. This whole thing. Just a little
Speaker 1: fun fact. Sure, Overday and I have bonded for for
Speaker 1: months and months over the Netflix story because we share
Speaker 1: joint interests account account, start account. We merely think that
Speaker 1: bond investors are completely irrational? What and we do not.
Speaker 1: I no longer write columns, so I'm not going to
Speaker 1: say that. But they're just it's a hundred forty million
Speaker 1: dollars of equity cushion underneath my I don't have to worry.
Speaker 1: So that's that. That's kind of play. Bloomberg Opinion columnists.
Speaker 1: You're overday, Thank you so much. Well, investors are trying
Speaker 1: to gauge where the US economy is amidst you know,
Speaker 1: weakening economies in Europe, slowing economy in China. How can
Speaker 1: the US economy remain vibrant when many of its trading
Speaker 1: partners are struggling to get the latest We welcome our guest,
Speaker 1: God Lebanon, Chief Economists North America at the conference board.
Speaker 1: Uh so, God, what's the data that you're seeing telling
Speaker 1: you about the US economy? Well, so, our leading economic
Speaker 1: index decline today, and that's not good news. But it's
Speaker 1: not as bad as bad as it looks. I think
Speaker 1: our index is slightly tilted towards the manufacturing sector, which
Speaker 1: is doing not as well as the rest of the economy. Um.
Speaker 1: I think, on the other hand, we have a very
Speaker 1: strong consumer spending numbers in recent months. You know, there
Speaker 1: was after the week winter there was a concern that
Speaker 1: the consumer spending is going to remain in a slow territory.
Speaker 1: But that's not the case. Um So, I think the
Speaker 1: decline in the leading index is not as bad as
Speaker 1: it looks. It's interesting though, to me, because this is
Speaker 1: the story we keep hearing. The consumer is strong, industrials
Speaker 1: and corporate America feeling less certain and certainly seeing less investment.
Speaker 1: Uh So, is this sort of indicative of the consumer
Speaker 1: being a lagging indicator and manufacturers being out front in
Speaker 1: the economic cycle or the other way around. Well, in general,
Speaker 1: consumer spending is actually leading business investment historically. I think
Speaker 1: part of the weakness that we are seeing now in
Speaker 1: business investment and in manufacturing is a result of the
Speaker 1: weakness in the rest of the world. But I think,
Speaker 1: and you know, if if manufacturing and business investment will
Speaker 1: remain slow at some point, it will impact hiring and
Speaker 1: and consumer spending as well. But at the moment, there
Speaker 1: seems to be some stronger, stronger growth, independent growth, I
Speaker 1: would say, from the consumer. So when we talk about
Speaker 1: you highlight the man facturing sector we've we've had some
Speaker 1: evidence that that has been weakening over the last several quarters.
Speaker 1: I'm just trying to parse out how much of that
Speaker 1: is just kind of trade concerns, Um, you know, maybe
Speaker 1: corporate spending kind of pulling back in the face of
Speaker 1: uncertainty about trade. Or is it just the kind of
Speaker 1: a slowing or just part of the cycle here we
Speaker 1: are ten plus years into a cycle. Do you have
Speaker 1: a sense of how much it's just Hey, it's just
Speaker 1: the psychle versus boy, I'm really concerned about some of
Speaker 1: these macro geopolitical issues. I think it's it's both. We
Speaker 1: we sometimes have cycles in manufacturing that don't spread to
Speaker 1: the rest of the economy. Like twenty fifteen twenty sixteen
Speaker 1: we had a genuine recession in manufacturing that the economy
Speaker 1: continued to grow. I think the manufacturing, as I said,
Speaker 1: is more impacted by the rest of the world, and
Speaker 1: there is some significant weakness in some parts of the world.
Speaker 1: So I think, um, it is a lot because of that.
Speaker 1: But if consumer spending continues to grow at three plus
Speaker 1: per cent and manufacturing at some point will pick up. So,
Speaker 1: just to put this in a perspective, the zero point
Speaker 1: three pc decline in the leading economic indicators. The index
Speaker 1: is the first decline since last December. And you talked
Speaker 1: about the manufacturing how that let it, But the housing
Speaker 1: side of things, the real estate side, I'm trying to
Speaker 1: figure out where that fits into the narrative because that
Speaker 1: also contributed to the decline. Yeah, so housing has been
Speaker 1: a weakness for a year. But I think one of
Speaker 1: the main implications of the large drop in interest rates
Speaker 1: that we have in the economy, and and over a
Speaker 1: hundred basis point drop in long term rates will boost
Speaker 1: the economy, and so a lot of the impact should
Speaker 1: be through housing. We are seeing already some increase in
Speaker 1: mortgage applications and I think housing will will improve for
Speaker 1: the rest of the year. So, God, where are you
Speaker 1: in the recession discussion? But there are certain parties out there,
Speaker 1: a certain factions in the marketplace that feel like, Gee,
Speaker 1: the timing, if nothing else would lead us to a
Speaker 1: recession perhaps by mid twenty What is your data telling you.
Speaker 1: I think the leading indicators are good for three to
Speaker 1: six months and they're not signaling any recession during that time.
Speaker 1: Beyond that, I think we have to think what what
Speaker 1: will cause a recession? There could things could pop up,
Speaker 1: but at the moment, I don't see anything obvious that
Speaker 1: will cause a recession. So I think it's as likely
Speaker 1: to happen in twenty twenty one, or twenty twenty two,
Speaker 1: or or twenty twenty. But it's it's not the fact
Speaker 1: that we just broke the historical record for the longest
Speaker 1: expansion doesn't by itself mean that we are about to
Speaker 1: face a recession. God Levanon, thank you so much for
Speaker 1: being with us. God levan and is chief economist for
Speaker 1: North America at the conference port Thanks for listening to
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Speaker 1: I'm Paul Sweeney. I'm on Twitter at pt Sweeney. I'm
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